Castle Brands Enters Wine Biz

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FILED SEPTEMBER 1, 2009

Dear Client:

Castle Brands has acquired the assets of Betts & Scholl LLC, a wine company formed in 2003 by Master Sommelier Richard Betts and Dennis Scholl. As a part of the deal, Castle Brands issued 7.14 million shares of common stock to the sellers and approximately $1.1 million of cash and notes. Dennis Scholl will sit on Castle Brands’ board of directors as an independent director, and Richard Betts will serve as vp and head of Castle’s newly formed fine wine division. The new wine division will represent “a small number of premium, like-minded brand owners and wineries” from around the world.

In a statement, Dennis Scholl noted that Betts & Scholl had “reached a critical tipping point: either we have to grow internally or seek a strategic partner to help us take our wines to the next level. Castle Brands is the missing link.”

Castle Brands, meanwhile, will benefit from Richard and Dennis’ “relationships with growers and winemakers around the world...Richard is a well-known Master Sommelier and celebrity in wine and food circles and the addition of Richard and Dennis gives instant credibility to Castle Brands’ efforts in the wine industry.”

Betts & Scholl wines include Grenache, Syrah and Riesling from Australia, Syrah from California, and Hermitage Blanc and Rouge from France.

DISTRIBUTORS AND DIRECT SHIPPERS HAGGLE OVER NCSLA INTENT

A bit of controversy has ignited between National Beer Wholesalers Association (NBWA) and Kirkland & Ellis, LLP on behalf of their clients that include Family Winemakers and Specialty Wine Retailers Association (SWRA) regarding the direct model bill. No, it’s not some of the classic arguments we’ve already heard regarding shipping – this one has a slightly different edge.

Paul Pisano, general counsel of the NBWA, took to his blog questioning whether the National Conference of State Legislatures (NCSL) actually supports the model direct shipping bill that has been used in countless direct shipping court cases. After reviewing one of the arguments used by direct shipping proponents, Paul said “it seemed very odd to us that the, a group dedicated to supporting state rights, would have an alleged action of that organization used AGAINST its member states. Justice Kennedy actually seems to believe that the NCSL developed and passed the model bill drafted by the California wineries.”

Paul then asked the NCSL to clarify its position (which he links to in his blog). They contend that “the model law was approved by the NCSL Task Force on the Wine Industry on November 5, 1997. NCSL took no further action on the model wine shipping bill, and it was not reviewed by the NCSL Executive Committee. It is not an adopted policy that NCSL lobbies for in Washington, D.C. The Task Force on the Wine Industry ended in 2002.”

Paul suggetss that NCSL does not technically support the model shipping bill because it was not approved by all its members, only a task force over 10 years ago. He then sent a letter to Kirkland & Ellis outlining the NCSL’s response and asking them to notify the federal courts in Massachusetts and Texas of their “alleged mistake” in claiming the NCSL supports the model direct shipping bill.

In his blog, Paul links to attorney Tracy Genesen’s response to his letter in which she adamantly defends their position. She gives some background on the court cases in Massachusetts and Texas, and then points out that Paul’s letter “does not deny that in this instance a NCSL task force endorsed and approved the Model Permit Bill in 1997. Nor does it deny that the NCSL has done nothing since that time to repudiate its approval.”

In fact, Tracy believes that a “dedicated task force” approving the bill is actually “more significant” in displaying the group’s support: “Indeed, the fact that the NCSL’s consideration of the matter occurred in the context of a dedicated task force — as opposed to a multi-issue compromise — makes the task force’s conclusions in some ways more significant, as does the resulting bill’s widespread adoption by state legislatures.”

“For these reasons,” wrote Tracy, “we do not understand your concerns.”

“You appear greatly concerned that the Courts be advised that ‘only’ a task force of the NCSL approved the Model Permit Bill. But to us that fact, if anything, makes the Model Permit Bill more authoritative.” She believes the disparity between a NCSL task force and membership as a whole is “at most an instance of quibbling over details.”

She also questions why the NBWA chose to send thisl letter after “the deadline for submitting briefing in the Massachusetts and Texas cases is now long passed.”

WSD CHATS WITH TRACY. In speaking with Tracy she told us right off the bat that “I’ve been very impressed by the actual professionalism by the parties on the other side, AG offices and wholesalers, who have in fact become litigants, so this is very surprising to me.”

We asked her if she thought the NBWA had a motive and she replied: “I don’t want to speculate on motivation because it would be speculation and I’d like to engage in civil dialogue and negotiations with these folks...at various times I’ve offered to sit down and talk with them about substantive issues and my invitation has never been accepted. I do renew my invitation to discuss any issues that would be productive and that could come to some type of compromise....we’re all working for consumers.”

She feels it “would be more productive to come together and not litigate.” She told us that “only as a last resort did the industry asked Kirkland to get involved in these cases...we are generally the more conservative industry lawyers and we don’t file cases unless we’ve hit a complete roadblock legislatively and with wholesalers.”

KAHLUA BOOSTS MARKETING SPEND WITH NEW TV AND PRINT EXECUTIONS

You may recall when Pierre Pringuet told investors earlier this month that they are pumping more marketing dollars in all strategic brands. We’re starting to see the first wave of that with an announcement that Kahlua is making an “unprecedented” investment in advertising support, including print advertising and cable tv.

The new ads highlight Kahlua’s Mexican heritage, said the company, while focusing on the “taste appeal” with Kahlua & Club, Kahlúa on the rocks and The Kahlúa White Russian.

The two new television spots -- along with three spots launched earlier this year – debut this month and will continue through the holiday season on select networks. This also includes a Kahlua flavors TV spot and print executions.

“This year’s heavy-up investment will allow us to reach an even greater audience during the time when it matters most to the success of our retail and on-premise partners,” said Andy Nash, brand director.

YOUNG’S MARKET APPOINTS HAYDEN O’SHEA

Young’s Market Co. today announced the appointment of Hayden O’Shea to the position of vp and general manager to the company’s estate group, which is its fine wine sales organization. Hayden will report to Dan Grunbeck, senior vp. He most recently served as director of sales for American wines in Northern California for Southern Wine & Spirits. Young’s currently distributes and brokers wine and spirits in California, Hawaii, Arizona, Oregon, Washington, Alaska, Idaho, Utah, Montana and Wyoming.

SWS OF NEW YORK BOOSTS WINE MANAGEMENT TEAM

The appointments include two internal promotions and an outside addition. Brett Dunne will now serve as vp, general manager in the wine division in New York State, while James Bonavita now holds the title of general sales manager, wine, metro New York. Lastly, John Gregory is promoted to vp, business intelligence, wine. These appointments were effective September 15.

Until tomorrow, Megan

“The intermediate stage between socialism and capitalism is alcoholism.”Norman Brenner

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